Any business can encounter problems that seem insurmountable. When that happens, business owners have a serious decision to make: should we declare bankruptcy? Filing for bankruptcy helps individuals and businesses get a clean financial slate, but not every form of bankruptcy works for all businesses. For businesses, the right choice depends on how the company is organized – sole proprietorship, corporation, LLC, or otherwise.
Today, we cover the basics of Chapter 11, Chapter 13 and Chapter 7 bankruptcy, and how each might be better suited to one type of business over another.
Chapter 7
Also known as “liquidation” bankruptcy, Chapter 7 stands out as the best option for situations where restructuring debt will not relieve a business’s debt burden. Smaller companies, like a sole proprietorship providing services based on the owner’s skills, likely do not have substantial enough assets to pay off their debts.
Chapter 7 is best suited for sole proprietorships because it provides relief for those who are personally liable for their business’s debts. LLCs and corporations do not qualify for the discharge that comes with Chapter 7, making Chapter 11 a better option.
Chapter 11
Bankruptcy under Chapter 11, known as “reorganization” bankruptcy, is the best choice for businesses who have a better chance at taking a turn for the better. The company reorganizes its debts into a repayment plan, overseen by a court-appointed trustee.
Chapter 11 plays the long game. It can take up to a year to confirm the repayment plan, which in some cases spreads payments out for the next 20 years.
Chapter 13
Chapter 13 bankruptcy, technically, is not an option for businesses. LLCs and corporations cannot file for this type of bankruptcy. However, since a sole proprietor is an individual who is personally liable for their debts, Chapter 13 provides another option. For sole proprietorships with a chance of turning things around, Chapter 13 can protect some personal assets while restructuring debt.